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Property Investors Find Foreclosure Loophole
August 2nd, 2013 2:41 AM

There is a new foreclosure loophole that investors have found in the Florida marketplace.  Many investors have found a way to purchase the titles to hurting condos and other community properties from homeowners associations, and then rent the units out, while making enormous profits.

These investors purchase the titles to properties by settling on the debt owed to an association via an HOA foreclosure auction, which generally settles for a sum much less than what is owed on the mortgage.  In turn, they have secured the right of possession until the bank and the court system have a chance to catch up and go through the actual foreclosure.  Once they secure possession, they rent out the unit to generate a return on their investment.

The issue at hand is that tenants of these properties are renting these units without disclosure of this information which puts them in a vulnerable position once the bank follows through. 

On one hand, the HOA recovers the funds that are due, which are needed for day to day operation of the association, the unit is occupied and less likely to be vandalized or stripped, and the investor makes a profit for settling the debts.

The flip side is that tenants get evicted and told that they have to move due to the bank repossessing the property, which can leave tenants in emotional situation.  Given that the unit was going to get foreclosed on anyway, does it really matter if someone purchases the right of possession for a finite period of time?

For the benefit of the tenant, if there is a lease in place, according the Foreclosure Act of 2009, the bank must honor the terms of the lease, unless the property is sold to someone with the intent to occupy the property, at which point the tenant has 90 days to find another place to live.

Attorney Donna DiMaggio Berger, community association law expert said, “That being said, it is prudent for the landlord to make that disclosure and prudent for a tenant to ask if any such situation exists prior to signing the lease.” 

Jack McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach also commented, “We’ve seen some very creative ways for people to make money in this downturn.  Some ways have been illegal, some have been shady, and some have operated in a gray area, but they’ve all been creative.”

For example, a property originally bought in 2005 for $454,000, was sold through a HOA auction for $14,900 and apparently the bank did not pay off the HOA delinquency and appears to have lost its right to repossess the property.  The final result is then bartered between the new title holder and the bank.

As crazy as this may sound, many attorneys that specialize in real estate law say that this is a savvy business model and completely legal.  Some investors use this as a strategy to delay the foreclosure auction then make an offer to the bank before it goes back to auction for a slightly higher price than it would sell at the auction. 

The result is a small investment upfront for the investor which can likely be recovered quickly and rented out.  Purchasing the property for a substantial discount before anyone else has a chance to up the opening bid, the owner gets a free and clear property at the end which they can continue to simply rent out and collect passive income, or turn around and sell it for additional profit.  Either way, there’s blood in the water, and the investments sharks in Florida are swarming towards it for a feeding frenzy.

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Posted by Michael Hobbs on August 2nd, 2013 2:41 AMPost a Comment

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